Q2 2021 Inter Parfums Inc Earnings Call
[music].
Greetings and welcome to the inter Parfums second quarter 2000 of 21 conference call and webcast.
At this time all participants are in a listen only mode of question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note that this conference is being recorded.
I will now turn the call over to Russell Greenberg Executive Vice President and Chief Financial Officer of Inter Parfums. Mr. Greenberg you may begin.
Thank you very much operator.
Good morning, and welcome to our 2021 mid year conference call.
As always this conference call may contain forward looking statements, which involve known and unknown risks uncertainties and other factors that may cause actual results to be materially different from projected results.
These factors include but are not limited to the risks and uncertainties discussed under the headings forward looking statements and risk factors in our annual report on form 10-K for the year ended December 31, 2020, and other reports we file from time to time.
With the Securities and Exchange Commission.
We do not intend to and undertake no duty to update the information discussed.
When we refer to our European based operations, we are primarily talking about sales of prestige fragrance products.
Inducted through our 73% owned French subsidiary Inter Parfums SA.
When we discuss our United States based operations, we are primarily referring to sales of prestige fragrance products conducted through our wholly owned domestic subsidiaries.
Of note the.
The average dollar Euro exchange rate for the 2021 second quarter was 1 point too.
Compared to 1.1, and 1.12 and the second quarters of 2020 and 2019, respectively.
As you know a week of dollar versus the Euro has a favorable impact on our net sales while gross margins are negatively affected.
And that is because more than 50 per cent of net sales of our European operations.
Denominated in U S dollars, while almost all of their costs are incurred in Europe.
I also don't have to remind listeners that last year's second quarter.
Much of the world closed down due to the treacherous days of the COVID-19 pandemic.
Our sales nearly ground to a halt.
And we recorded the first ever quarterly loss in our 33 years as a public company.
What a difference a year of mix.
When we announced initial 2021 guidance the last November our visibility was minimal.
Since then with the benefit of time, we have raised annual guidance twice.
Today, COVID-19, and its variance the distribution and acceptance of vaccines and the wide range of changing regulation in various jurisdictions continue to make projections extremely challenging.
Moving on to today's business 2021, second quarter sales were far better than our best expectations.
And the operating leverage that resulted was as good as it gets.
In the news release, we issued yesterday, we focused on the comparison between the 2021 second quarter and first half with the same periods in 2019.
We will continue with that format during this call.
Second quarter 2021 sales of $207.6 million were 25% ahead of $166.2 million in the second quarter of 2019.
Through the first half our sales are running nearly 18% ahead of 2019 as first half.
Sales by European operations up, 19% and U S operations up by just over 13%.
For U S operations second quarter gross margin rose to 53% from 52% in that same period in 2019.
The decline in the dollar versus the euro contributed to a slight decline in the gross profit margin for European operations, which came in at 67% compared to 68% in that second quarter of 2019.
SG&A expense was 42 and 40% of net sales for the 3 and the 6 months ended June 30th 2021.
And that compares to 51% and 47% respectively in the same period from 2019.
European operations SG&A expenses represented 44% of net sales compared to 54% in 2019.
And for U S operations SG&A expenses represented 36% of net sales in 'twenty, 1 compared to 40% in 2019.
After a hiring freeze in 2020, we made several new hires this year and business travel has reduced the has resumed somewhat.
But overall, our administrative expenses have not risen in proportion to the top line growth.
2021 second quarter promotion and advertising, which is that is included in SG&A.
Was $33.2 million or only 16% of net sales.
By way of comparison.
In the second quarter of 2019 promotion and advertising expenses was $36.4 million or 22% of net sales.
For the year as a whole we continue to expect promotional advertising expenses to approach historic levels of 21% of net sales on a full year basis, which based upon our current sales guidance would be around 157 million and total.
Line that we have another approximately $100 million to spend in the second half.
Thus far inflation did not have a significant impact on our operating results pricing costs budget or outlook there.
This has begun to change in Q3, especially with transportation costs and we will be monitoring these effects very very closely.
Our second quarter operating margin came in at 22 per cent compared to 14% in the same period in 2019.
And for the first half our operating margin was 23% versus 16% in the first half of 2019.
We closed the second quarter with working capital of $462 million, including approximately $298 million in cash cash equivalents and short term investments and of working capital ratio of over 3 to 1.
The $133 million of long term debt relates to our Paris headquarters acquisition, which was financed by a 10 year 120 million Euro bank loan.
Approximately 80 million euro of this variable rate debt was swapped for a fixed rate debt.
Cash provided by operating activities aggregated $38.1 million.
For the 6 months ended June 32021.
As we have reported last month and affirmed yesterday.
We raised our 2021 sales guidance.
Approximately $750 million.
<unk> in diluted EPS of $1.95.
Our guidance assumes the average dollar euro exchange rate.
At current levels.
And that there is no significant resurgence in the COVID-19 pandemic.
Once the Ferragamo deal closes, we will revisit the subject of guidance and make adjustments based upon pending orders and inventory levels now.
Now I will turn the call over to Sean.
Thank you Russ and good morning, everyone.
Our message today can be summed up in 3 sentences.
The business is booming.
Demand is very strong.
Yeah, 2 of them all our brands our outperforming what we book.
It did at the beginning of the year.
So let me move into the tens.
Through the first half of 2021.
In our largest market North America Rose 59 book, the Sun as compared to 2019 the.
Is huge.
Sales in Western Europe, and Asia were relatively flat.
The first half 2019, and it's pretty good.
Sales in 2 of our smaller markets Eastern Europe, and central and South on the well ahead of 54% of 10% respectively. Although the first half of 2019, when the sales in the middle East declined 22%.
Well the largest run are running ahead of 2019.
Montblanc, Jimmy Choo coach and get.
The rose, 3% from <unk> 59 per central Jimmy Choo.
34 per cent for coats and 58 per cent for guests compared to the first half of 2019.
You may recall that we launched explorer from the line in 2019, and hence the less dramatic conversion.
Although international travel is slowly resuming the impact on our of travel retail duty free business is very noticeable.
Pre funding the business historically represented around 15% of our net sense.
That said online sales have been quite good.
Just a reminder, we do not conduct e-commerce with consumers, but the products are sold across multiple income at the drums.
Our products are sold through the website of the bottom of installs and sufficient is the Midtown line sounds like T mall, and Amazon and the websites of I realize themselves.
On the really the subject of ease in buffer, which will play out the minority interest.
As of July 2020 has been doing quite well with strong sales growth, but because it's the minority interest.
It says I don't know the consolidated.
Of course, the Big news of the last month.
The Fiat Gamble, we are the.
Delighted to welcome <unk> got more to our portfolio of fragrance brands, which will officially happen in October the October 1.
See I got more has been the timeless classic luxury brand flow generations of quality driven consumer sales.
Moving to regions dating to the early seventies from 19.7 E. C. I got more Buck from encompasses lodge in the suite of men's and women's fragrance, but the produced in Italy and distributed worldwide.
From our work studying the advent of potential we're confident that the expertise we bring to product development the packaging of advertising.
Marketing and distribution will elevate the brand strict once the profile the longer the sense, especially in the blends the largest market, which is China and North America, where we have established a very strong presence.
We all thought she thinks of the assets of the business into the invent the retools molds, which are food and to a wholly owned subsidiary audio of Italian subsidiary, which we will manage operate and grow the.
In the flow once it did.
We're also taking non feel like almost obligations include the employment agreements and contractual agreements with suppliers and distributors.
In conjunction with the acquisition agreement at the closing we will sign the 10 year exclusive worldwide license agreement with the 5 year optional extension with the set of of adult Ferragamo group, We've of course, <unk> T and the.
How much of that you can replay of months.
Mr Murray.
The strength.
I will plan calls for both legacy and new fragrance products.
Continue to be produced the muted.
And we are starting at the 2020.
For the first new product launch for the brand.
The Salvatore Ferragamo group has interest to the adapt pharma.
Is it the fragrance part now because of the success. We have enjoyed the revising fragrance has done with the have not lived up to the potential we have.
We've made the commitment to the Ferragamo group to devote the attention and resources necessary to grow.
Let's see I got more fragrance business within the city of luxury distribution framework that we have established within our global distribution network.
But we're not done yet growing the brand portfolio remains of high priority with the focus on names, which have a reasonably large established fragrance business and those on the US believe the frequency of randy's underserved by the current license.
We have been very successful taking on the challenge of taking of the fragrance brands that we are not keeping up with the onshore and reading the.
Good day.
Go it seems the offense.
I want to use this opportunity to agro range, our suppliers throughout the world.
The relationships with them with the manta during the pandemic and this was the among the reasons why we were able to maintain sufficient inventory of finished good the components to fulfill the the sales in all of this.
She wouldn't book of a sense.
Supply chain challenges have been more prevalent in recent weeks given the deal.
But we of BPM before and have always been able to maneuver through and resolve the issues.
Before taking your questions, we want to shift from day preview of desktop phone will participate in the number of virtual investor conferences, including the new.
The GAAP consumer conference on September 9 and Citi Global Consumer conference, which runs from the settlement to be some of the line will also present at the Jefferies with of course consumer confidence.
The 16th of November.
And also the weapon to once again almost all of them.
The annual meeting of shareholders to get relief on Tuesday October 5th opinion.
We look forward to reporting on our progress.
Unfolds, so she live in 'twenty and the operator, we can open the floor to questions.
Thank you.
And at this time, we'll be conducting a question and answer session. If you would like to ask a question press star 1 on your telephone keypad.
A confirmation tone will indicate your line of isn't the question of Q you May press. The star key followed by the number 2 if you would like to remove your question from the queue from participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, 1 moment, please while we poll for questions.
Our first question comes from the.
The Bolton Weiser with D. A Davidson. Please go ahead with your question.
Yes, Hello, how are you.
All good line good.
Okay. That's good.
So.
About roster of your comments on gross margin I mean, you compared it to the second quarter of 19, but it but actually if you look at it just like compared to the first quarter of 'twenty 1 it actually went up sequentially.
So I'm just curious why that is because the euro comparison is actually.
Unfavorable in the second quarter, so well why wouldn't the gross margin even higher in the second quarter than the first quarter.
Can you just give a little more color on that.
So certainly Linda.
All of a lot of a lot of it was actually.
Up for for both the 3 out of the 6 months period.
And much of that is due to the increase of the sales and us being able to leverage some of the fixed costs that are included in the gross margin.
As you know certain a certain depreciation of tools and molds, especially here in the United States.
That's more of a fixed expense that is included in the in the.
Gross margins so that when sales are higher you're better able to leverage those type of expenses.
In addition, and I suppose more for the European operations.
The number and percentage of gift sets that are sold during the course of the of the quarter in 2021, where as a percentage of total sales were much less than that of 2020 and that also attributed to the increase of the sales and the end of the gross margin during that period.
Okay. Thank you and then can you just give a little bit more color on the on the Ferragamo license like maybe the long term potential of that brand I mean, I know it has existing sales can you can you give us the size perhaps of the annual.
The revenue currently and then how do you see it sizing up the first with some of your other franchises.
Yeah.
Yeah. So the house you want to try to answer them.
Yeah, the the Ferragamo the the Ferragamo fragrance business.
<unk> was in the high double digits for many many years.
And you know of Ferragamo is publicly traded so a lot of this information is really available online and you can you can see it for yourself. So we really have not gone out and publicly disclosed.
Their numbers and I really don't want to but needless to say the fragrance sales as a result of the COVID-19 pandemic.
We were impacted severely.
During the course of the last year the 2 years.
So our goal is really to be able to reinvigorate and bring back ferragamo too it's the law.
Level that it has seen.
For the for the last 10.15 years.
And that's really where we're the Goldman so I don't really want to of Numerate and put specific dollar figures out there.
But there's probably enough information in the public domain that you could probably.
Our research and find the for yourself.
John do you agree on that.
Yeah.
Yeah, the informations of leaks or most of them.
The 1.
So we know Phil I got moved for a while.
Of the fragrance, where we are.
The run in terms of <unk> by the fresh in the house.
But the.
We met the again during the pandemic and I feel.
I've got more of a management decided to to really look at the well proposal of the licensee.
Because of the D.
The C code for them to fight the law.
And the same by unknown, so by Germany, joining our portfolio again with much stronger.
The benefit from the strength of our well run from the Alibaba or of the bonds from the strength of our rail distribution and we have big plans of the I've got more.
On the as an existing business.
The which is absolutely fine and the idea would be true to launch the new product in 2023 with scores of them.
The stronger the months of the bond the.
The brand is known.
Don't have any issues with the with.
We do them.
Perception of the gun, we just need to reestablish some at the up the top luxury of.
The fragrance.
The market.
We think it's a total yet achievable.
And we give out sales for 2 to 3 years to be back in I believe all day they were pre COVID-19.
Okay.
Thank you from Q and then thank you.
Yeah, Oh, yeah.
Right.
And I guess, yeah, you mentioned of the cost inflation that is kind of changing of becoming a little bit more so in the third quarter are you, including in your guidance, specifically any any margin pressure from increased cost.
Or are you, hoping to offset or or what is exactly included in your guidance.
Yes the guidance.
We have.
Yeah.
In the guidance, we have the of course, we look at the out of costs.
And Thats true with the system.
The bulk of our cost of goods are going up.
Chris Millington.
The freight.
Worldwide, he's going up it's a free up so our cost of doing.
The <unk> components and moving components worldwide Cook, but we have sort of the.
The major challenge on the.
On the of the supply so.
Moving to 2 to accept certain price increase.
All of this is already taken into account.
Yeah.
Well.
Okay.
Right.
Yes, that's exactly what I was going to say when when we when we issued the.
The revised our guidance most recently when we announced sales back I think it was the 19th.
These these this new guidance definitely includes the.
The effect of the sort of some of the supply chain issues that we are seeing.
The sales were prepared on a relatively conservative basis to take that into consideration from a margin standpoint, we've absolutely.
Incorporated some of the additional transportation costs that we've seen that that's really the biggest inflation area.
That we're faced with at the current time, our transportation costs are up in some cases 2 of 300 per cent.
So moving components from from country to country.
We are taking a deep dive and looking at what we can do in order to to get around some of those increases but as.
As far as the the numbers that we've projected for the remainder of the year, we've definitely taken into consideration.
The lions share of of the potential effects.
Okay. Thank you so much I appreciate it.
Thank you.
Our next question comes from Steph Wissink with Jefferies. Please state your question.
Uh huh.
Thank you and good morning, everyone. I also have a few questions that they kind of breakfast line is for you on marketing just wondering if you can help us think 3 of the cadence in the second semester is there a weighted by quarter of Q3 Q4, how do you want us to kind of model.
A&P for the back half Yeah, certainly you know.
Based upon what we see from this from the sales trends of Q3 and Q4 from a sales standpoint will probably be relatively closer.
Together than they have in the past.
But from an advertising standpoint, our advertising expenditures are always much more concentrated in Q4.
Then in Q3.
In addition, we have an initial.
I'll call it.
Small exclusive prelaunch for Montclair coming up in the fourth quarter.
And in anticipation of the 2022 launch 4 Montclair, we know that we've already allocated certain dollars of marketing spend that we're probably going to put into the marketplace in Q4, and the 2 kind of advance it in anticipation of the 2022.
The launch of the new mine quite of fragrance. So I would definitely say the things are going to be much more concentrated in Q4 than Q3.
Alright very helpful. And then my second question is just in relation to Linda's question on cost.
Do you have any plans to raise price and if you do what's the process to raise like for like price on your product in the market already do you think of retailers noted.
They can you implement what should we be thinking about from pricing.
Yes, we have the we have not raised prices for more than the 3 years, but we have decided to increase prices. We gave notice to most of our ruckus. The mill from August 1. So this was not the long time ago.
We will have the certain price increase on January 1 of the reception was quite to the accepted because of the because we don't do this oh fun and and it seems that all of our competitors.
Have the out doing it too so we didn't see any of them.
The issues, we've got to the price increase the trucking about.
Anywhere from 2% to 4%.
Okay.
Okay very helpful and my last 1 maybe John This is for you is just bigger picture of thinking about how consumers are engaging in the category. It's just really been so impressive year to date has there been any change by channel or by specific distribution point, where youre seeing consumer behavior coming back out of the backside of.
Covid, maybe turning up a little bit differently in different destinations than you would've expected.
Not really not really I don't see any changes the.
The online business continued to be strong with the bottom of the schools in the US we should jump of humility and this is also good.
To the.
This is good for the.
On the on all the all the channels.
But what we see is quite impressive because the we are receiving all of them today that we cannot receive because they all of the way way of above.
Our forecast.
So we missed.
Could you see this growth.
Neither of the quantities of the tweet.
They can set of the next smartphone to know that the different nobody has the thought of inventory.
Actually some stores that are completely new because the they would like to have more inventory.
We're all in the net.
We're in the very good position of inventories at the store is moving very very fast.
We are shipping.
Shipping the on the.
The on the day, they see sort of some store we can do he says some stores the pro.
The.
Very fun.
Not in this for a long time I've.
Duncan and bill in the law.
The Pfizer Inc.
As such of such a stronger demand for the cross sell across our brands.
Okay.
Very helpful as always thanks, gentlemen.
Thank you.
Yeah.
Our next question comes from Mohammed <unk> with Dws financials. Please state your question.
Hi.
Just on the comment you just made about inventory.
Is it do you think that youre picking up share or is the entire pie actually expanding faster than you think.
So in certain markets in the U S. We are picking.
Speaking of share because of where our 1 of the first wanted to the 2.
<unk> to ship the again, where we're 1 of the first 1 to 2 re spend again in the.
In marketing in a day so.
So different.
Taking your market share in Europe is a little bit different mix of little bit slower.
Because of come back into the I'm not fully open as we speak.
So it's on the enough, but in the U S and in China, we are different.
The market share.
And what have you.
As far as the duty free stores.
Comprising of your revenue right now are they back to normal for you.
No no no well very very very far from the very small.
The.
As I said might come on line to choose to present the group of 15% of our rail business were still very very strong we've seen some some of the strong business in the in the.
The China, a reason of course, a non oh.
So well see some strong business in the Korean duty free we have some of the.
Some Chinese the.
The traveler.
So of Korea duty free China duty free ease of.
Of the phony, but.
Overall, we are well aware of it.
Below the eyewear.
More of the percentage of sales in the.
The travel retail.
And my final question was how do you.
The Scriber assess your 22 product launch plans is it going to be as robust as it was this year.
And we have the mix of ex Zane book go too long shares of what we call it.
What's the goal of blockbuster launchers and of course, the Franco to keep the line.
So we are of great mix.
The <unk> going forward.
Market is really looking at all of our programs and the and the responding quite positively so all of our firm.
The problem today is more of the manufacturing and making sure to have more inventory there.
<unk> to supply all of the human but the demand was not the focus and that's why we raised the already twice.
Well I.
The diagnosis.
As you know of the companies the companies are quite conservative when we give guidance. So we'll wait until the tomorrow, we fair number of months of.
2 before before the review again, but the.
The challenges we have the other is we have a we have customers. We just have to supply them. So it's a good problem to have and we are.
And welcome the quite quick.
Okay. Thank you.
Thank you have line.
Thank you. Thank you there are no further questions at this time I'll turn the call back to the management for closing remarks.
The.
Thank you. Thank you and thank you all for tuning into our conference call.
As usual if you do have any further questions I can be contacted by email.
<unk>.
Once again of cutting into the call stay well and stay safe.
This concludes today's conference of parties may disconnect have a great day.